Geithner’s Gaffes

March 24th, 2009 by Phil Mattera

The first thing that stands out in the financial rescue scheme just introduced by Treasury Secretary Timothy Geithner is the curious choice of terminology. The plan is labeled a Public Private Partnership Investment Program (sometimes “partnership” is left out). Was any thought given to the fact that public private partnership (PPP or P3) is a common euphemism for the privatization or outsourcing of public services by state and local government? Does Geithner really want people to associate his plan with contracting boondoggles?

Then there’s his use of “legacy” to refer to what most people have come to call toxic assets. Yet “legacy” is also the term the auto industry uses when speaking of retiree health benefits and other structural labor costs. Geithner’s references to “legacy assets” and “legacy securities” are thus both a clumsy effort to sanitize common parlance and a potential insult to unionized workers.

Finally, the plan depends heavily on “non-recourse loans.” That same phrase is associated with agricultural subsidy programs—a form of spending that the Obama Administration is seeking to curtail.

The flaws in Geithner’s plan do not end with the branding gaffes. There’s also the awkward fact that the content is essentially the same as the original Troubled Asset Relief Program, with extraordinarily generous sweeteners added for private investors. In other words, Geithner is proposing an even bigger giveaway to private interests than was envisioned by Henry Paulson.

Paulson, of course, abandoned the idea of toxic asset auctions in favor of massive infusions of federal funds into banks large and small. He apparently did so in part because of concerns that it would be difficult for anyone to attach a value to those repugnant securities. There was also a built-in contradiction between the desire of vulture investors to buy at the lowest possible price and the need of banks to get paid something approaching the nominal value of the assets, so that their balance sheets did not collapse. Not to mention the conflict of interest stemming from the fact that the money managers Treasury wanted to handle the sale of the assets had their own holdings in the mortgage-backed securities market.

None of that has changed six months later. The only difference is that Geithner is willing to commit up to $100 billion of taxpayer money to allow investors to purchase the “legacy” assets in a way that puts very little of their own money at risk. The feds would both contribute directly to the purchase price and lend additional money to investors so they can buy more. These are the non-recourse loans, meaning that the purchaser does not have to repay them in full if the security plunges in value.

I get the impression this is the posture Geithner finds most appealing—giving cushy deals to major financial players. As his lame handling of the AIG bonus controversy and his unwillingness to terminate zombie banks such as Citigroup show, he is not inclined to really crack down on Big Money. So why is he handling one of the most important portfolios of an administration committed to change?

2 Responses to “Geithner’s Gaffes”

  1. Your article was tremendous. I would like to add some value. Your claims of expense to the taxpayer shows lack of the most important inside information. This concerns securitization of securities. I decided to study bonds as a means to assist Native Peoples reach Financial Autonomy under the Declaration on the Rights of Indigenous Peoples. There are so many infrastructure bond municipal programs that I was sure that money was not being paid back. There had to be another mechanism in place. I managed to get my most significant questions answered by a consultant to municipalities (before she shut up). Municipal Bonds are backed TWICE. They are sold through brokerages AND the money is identified through either the state General Fund and/or the local general budget. By double backing, any accountant can find how the money was still spent at the same time it was returned, and with interest. Since it is backed twice, it can be spent on the project ONE and can be returned TWO (backed twice).

    Extended to banking theory, the six to one leverage on the purchase of bad assetts risks NO federal money, at all. They use banking. Under specific circumstances, related to assett collaterilization, banks are allowed to make a duplicate of a designated sum. This is usually seen in the form called “matching funds”. The initial sum GENERATES the matching funds inside a bank. Under maximum extension, sometimes used in pension plans, the initial sum can be duplicated twice. This gives a sum of 3X the initial sum. That is the amount to be paid IN CASH for the bad assetts. Three times the private amount offered in auction. That 3X is then matched by low interest Federal Loans that are backed. By backed I mean that default causes the property to fall into Federal hands and thus does not remain on the balance sheet of the private investor in bad assetts. This yields the 6X. There is NO taxpayer money risked. This system is probably considered sleight of hand, but actually originated with the gold standard. Gold behaves very differently from paper money (within a gold standard). For one thing, it is very heavy. Therefore, it tends to be used as a kind of reserve. Paper is printed off of gold as a portable “replacement”. However, even after the paper is spent, the gold remains. Don’t kid yourself, electronic money is very different from paper money. Electronic money depends MUCH more on the integrity of banking personnell than paper money. Counterfeiters are a rare breed. In addition, there are special fibers that are placed in federal mint paper to assure authenticity of the money being issued. I have received counterfeit. It bled all over a hundred dollar bill I had, when my wallet got wet. I was then given a complete lecture on how to detect counterfeit. This was quite a few years ago. Paper, Ink, AND counterfeiter skill are necessary to mint money. With the skill level of Americans going down so fast, it is LESS and LESS likely that counterfeiting involves physical paper. I think I received my counterfeit in the heart of logging country in Oregon. An area that depends for its living on the selling of pulp wood and other timber. Paper is made from pulp wood. The machine shop skills of the logging community are unequaled in almost any other area of endeavor, in the United States, whatever their other flaws.

  2. Glenn Rabenold says:

    Quick additional note from same contributor. I agree fully about the public private fiasco. It is my opinion that the inclusion of the private sector in the rehabilitation of the bad assetts was like inviting the fox to take up residence in the chicken coup. WORSE, there is a distinct possibility that Geithner is WAITING for the big banks that own Countrywide and American Services (the worst offenders in the Mortgage business in terms of predatory loans) to recapitalize BEFORE the bad assetts come up for auction. As it stands, they would be barred from participating. Wells Fargo owns American Services and Bank of America owns Countrywide. They should get on selling the bad assetts. Those toxic assetts are acting like a cancer and it is not a treatment of cancer to water it down. Watering it down spreads it. It was postulated that the big banks would buy each other’s bad assetts WITH permission from the Treasury. Tarp recipients also have an advantage in being able to pay more, for structural reasons. This tilts who will receive the assetts in auction. It looks like it is a rigged auction. The greed that was so visible in the acquisition of Countrywide is related to the acquisition of real estate assetts and is distinct from the usual greed for money. Bank of America has a lot of concessions to bankers from Mexico as does Citigroup. Citigroup owns Banamex, which used to be one of the top banks of Mexico. It now shares billing with quite a few. It is my concern that predatory mortgage loans are a tangible means of replacing local residents with a “chosen” collection of replacements. These new residents, in California, are being increasingly divided into more rigid class distinctions.

    Please put a little pressure on Geithner to get started with the bad assetts auction. We need more solid liquidity in the marketplace.

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